TEXT-S&P summary: China Life Insurance Co. Ltd.
(The following statement was released by the rating agency)
Dec 31 -
Summary analysis -- China Life Insurance Co. Ltd. ----------------- 31-Dec-2012
CREDIT RATING: Country: China
Local currency AA-/Negative/--
Primary SIC: Life Insurance
Credit Rating History:
Local currency Foreign currency
16-Dec-2010 AA-/-- --/--
20-Jan-2009 A+/-- --/--
The ratings on China Life Insurance Co. Ltd. reflect our view that there is a "very high" likelihood that the company will receive timely and extraordinary support from the government of China (AA-/Stable/A-1+, cnAAA/cnA-1+). In addition, the ratings reflect China Life's robust business franchise and strong financial profile. Moderating these strengths are the financial risks arising from a mismatch between the duration of the company's asset and liabilities, and potential market volatility, given the underdevelopment of the capital markets in China. In addition, China Life faces operational risks stemming from its large geographical coverage, given the industry's restrictive regulations.
We consider China Life to be a government-related entity (GRE) and believe that there is a "very high" likelihood that the company will receive timely and sufficient extraordinary government support in the event of financial distress. We assess China Life's stand-alone credit profile (SACP) to be 'a'. Our view of the likelihood of extraordinary government support is based on our assessment of the following China Life characteristics:
-- Very important role to the Chinese government through supporting the government's policy to provide social welfare to Chinese citizens.
-- Very strong linkage to the government, reflecting the government's ultimate ownership of China Life through China Life Insurance (Group) Co. (not rated). The government appears to have influence over the appointment of China Life's senior management. The government provided support to China Life's parent holding company: insurance policies written prior to 1999 have high guarantee rates through a fund that the Ministry of Finance provided. These policies were transferred to the parent company when China Life was listed in 2003.
China Life's competitive position within China remains very strong despite a slight loss of market share in recent years due to the continued growth of other players and the impact of a drop in business through bancassurance channels. China Life accounted for more than 30% of the industry's gross premiums written in the first nine months of 2012. The company has a big competitive advantage over its peers due to its vast nationwide distribution network and the largest number of insurance agents (at about 682,000 as of end of June 30, 2012) in China. The company also has a strong position in the bancassurance market, with about 96,000 outlets through different banks all over the country. In 2011, China Life's business growth slowed, mainly due to local regulatory changes for bancassurance. In 2012, this trend reversed because the company strengthened its teams of individual agents and introduced new traditional products to the market, such as "Kangning Whole Life 2012." We expect China Life's growth rate to be less than 10% in coming years, which would be in line with the market average.
We view China Life's financial profile as strong, although it has weakened marginally due to lower capitalization. The company's operating performance deteriorated in 2011 and 2012 due to significant investment impairment losses amid a weak capital market in China. China Life's annualized return on average assets dropped to 1.16% in the first half of 2012 from 1.24% in 2011 and 2.56% in 2010. We expect the operating performance to be under pressure for 2012 due to potential volatility in the domestic capital markets.
Meanwhile, we expect China Life's capitalization to stay at a moderately strong level despite the pressure to support growth. In June 2012, the company issued Chinese renminbi (RMB) 28 billion in subordinated debt and a further RMB10 billion issuance in November 2012, signaling a continuing need to fund expansion with debt. However, China Life's debt leverage and interest coverage are still within our tolerance levels for the rating. The company's good access to capital markets and potential government support its strong flexibility.
China Life invests conservatively in good quality, long-duration assets. Nevertheless, we view the underdeveloped domestic capital markets and regulatory restrictions on investments as constraints on the company's ability to manage its asset-liability mismatch. The company has held assets with significant risk levels in recent years; about 10% of its total holdings are in equities. Despite that, the insurer's investment portfolio is prudent, in our view, because most of its asset allocation is in government and government-agency bonds, and cash deposits. The bonds mostly have maturities of more than five years.
China Life is exposed to significant operational risks compared with peers given its very large size and extremely diversified geographic spread across China. The company has made good progress in risk management through provincial centralization to improve efficiency and reduce operational risks since it listed in 2003. However, we believe China Life has a limited ability to manage increasing risk complexity.
Enterprise risk management
China Life's enterprise risk management is adequate, in our opinion. The company adopts a traditional and silo-based approach rather than a more holistic approach. China Life monitors risks through its risk and internal control committee. The committee, headed by the CEO, comprises senior managers.
We consider China Life's overall risk awareness to be adequate although the company does not have a chief risk officer. The establishment of individual risk departments within provincial branches that report to the headquarters' risk department provides management with better operational oversight. China Life produces an annual risk report, encompassing underwriting, market, investment, credit, and operational risks.
The negative outlook reflects our view that China Life's profitability and capitalization will remain under pressure over the next two years, due to potential market volatility and the company's continued growth. China Life's operating performance should remain strong but weakened. The company's competitive position is also likely to remain very strong while the likelihood of extraordinary government support for the company remains very high.
We could lower the ratings on China Life if the company's capitalization deteriorates to a level that is no longer commensurate with the SACP of 'a'. Such deterioration could materialize if the company's operating performance continues to weaken over the next two years while the insurer continues to grow. We could also lower the rating if we believe the likelihood of extraordinary government support has reduced, which we view as a remote scenario.
Conversely, we could revise the rating outlook to stable if China Life's operating performance improves to the level it attained a few years earlier, and the company's capitalization stabilizes.